DCIT, Circle - 2(1), Hyderabad V. M/s K & S Consulting Group (P) Ltd, Hyderabad

ITA 1844/HYD/2012

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 4817 (ITAT-HYDERABAD)
• Duration Of Justice: 8 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-08-2013
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2007-2008
• Appeal Filed On: 21-12-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: P SOMASEKHAR REDDY
• Keywords: Sale consideration of property below Jantri Value; Capital asset; Cost of acquisition; Wholly owned subsidiary
• Section: 50C; 11

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A', HYDERABAD BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA NO. 1844/HYD/2012 ASSESSMENT YEAR 2007-08 THE DCIT CIRCLE-2(1) HYDERABAD VS. M/S. K & S CONSULTING GROUP (P) LTD., HYDERABAD PAN: AABCK4891K APPELLANT RESPONDENT APPELLANT BY: SRI P. SOMA SEKHAR REDDY RESPONDENT BY: SRI K.C. DEVDAS DATE OF HEARING: 16 .0 7 .2013 DATE OF PRONOUNCEMENT: 23.08.2013 O R D E R PER CHANDRA POOJARI, AM: THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDER OF THE CIT(A), VIJAYAWADA DATED 12.7.2012. 2. THE REVENUE RAISED THE FOLLOWING GROUNDS: (1) THE CIT(A) ERRED ON FACTS AND IN LAW IN GRANTING RELIEF TO THE ASSESSEE. (2) THE CIT(A) ERRED ON FACTS AND IN LAW IN STATING THAT THE AO HAS NO POWER TO DISTURB THE VALUATION OF SHARES EVEN WHEN THE TRANSACTION IS COLLUSIVE IN NATURE. (3) THE CIT(A) ERRED ON FACTS AND IN LAW IN IGNORING THE COLLUSIVE NATURE OF THE TRANSACTION OF SALE OF SHARES UNDER 'BUY BACK SCHEME'. (4) THE CIT(A) ERRED ON FACTS AND IN LAW IN NOT ADOPTING THE CORRECT VALUE OF SHARES OF M/S. KSK ENERGY VENTURES (P) LTD. AT RS. 18.15 PER SHARE. (5) THE CIT(A) ERRED ON FACTS AND IN LAW IN HOLDING THAT THE REAL VALUE OF THE SHARES CANNOT BE ADOPTED BECAUSE THERE IS NO PROVISION UNDER LAW DESPITE THE FACT THAT THE TRANSACTIONS ARE COLLUSIV E IN NATURE. ITA NO. 1844/HYD/2012 M/S. K & S CONSULTING GROUP (P) LTD. ============================ 2 (6) THE CIT(A) ERRED ON FACTS AND IN LAW IN STATING THAT CAPITAL LOSS WAS CONSEQUENCE OF OBLIGATION OF THE ASSESSEE DUE TO THE 'PUT OPTION' EXERCISED BY IDBI THOUGH THE PURCHASE OF SHARES FROM IDBI AND THE SALE OF SHARES ARE TWO INDEPENDENT TRANSACTIONS. 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE-COMPA NY WHICH IS IN THE BUSINESS OF MANAGEMENT CONSULTANCY AND PROJECT DEVELOPMENT HAD 2,85,12,900 EQUITY SHARES A CQUIRED AT FACE VALUE OF RS. 10 PER SHARE IN M/S. KSK ENERGY VENTURES PVT. LTD. (FOR SHORT M/S. KSK INDIA). DURING THE YEAR, IT HAD ACQUIRED 12,50,000 EQUITY SHARES AND 12,50,000 PREF ERENCE SHARES OF M/S. KSK INDIA FROM IDBI AT A PRICE OF R S. 16.09 PER SHARE. THE ASSESSEE COMPANY FURTHER ACQUIRED 10,900 EQUITY SHARES OF M/S. KSK INDIA, FROM INDIVIDUAL PROMOTERS OF THE SAID COMPANY AT A PRICE OF RS. 10/- PER SHARE. LATER ON, IN RESPONSE TO OFFER OF 'BUY BACK SCHEME' OF SHARES MADE BY M/S . KSK INDIA, DATED 06.11.2006, THE ASSESSEE COMPANY SOLD THE ENTIRE HOLDINGS TO M/S. KSK INDIA AT RS. 10 PER SHARE, WH ICH RESULTED IN LONG TERM CAPITAL LOSS OF RS. 2,22,41,360 IN RESPECT OF 2,85,12,900 SHARES ORIGINALLY HELD AND SHORT TERM C APITAL LOSS OF RS. 1,52,19,864 IN RESPECT OF 25,10,900 SHARES ACQU IRED DURING THE YEAR FROM IDBI AND INDIVIDUAL PROMOTERS OF THE SAID COMPANY. 4. THE ASSESSING OFFICER HELD THAT THE ASSESSEE COMPAN Y UNDERVALUED THE SHARES BY ACCEPTING THE OFFER OF 'B UY BACK SCHEME' OF M/S. KSK INDIA, AT RS. 10 PER SHARE. TH E ASSESSING OFFICER CALCULATED THE VALUE PER SHARE BASED ON THE BALANCE SHEET AS ON 6 TH NOVEMBER, 2006 AND ARRIVED AT A VALUE OF RS. 18.15 PER SHARE. HE FURTHER STATED THAT M/S. KSK I NDIA, HAS DURING THE YEAR ISSUED 9,00,00,000 EQUITY SHARES AN D 3,00,00,000 PREFERENCE SHARES OF RS. 10 FACE VALUE, AT A PREMIUM OF RS. 7 PER SHARE TO M/S. KSK - MAURITIUS. BASED ON ITA NO. 1844/HYD/2012 M/S. K & S CONSULTING GROUP (P) LTD. ============================ 3 THIS ISSUE, THE ASSESSING OFFICER OPINED THAT THE C ORRECT VALUE PER SHARE SHOULD BE TAKEN AT RS. 17 AND THE SAME OU GHT TO HAVE BEEN THE CONSIDERATION RECEIVED BY THE ASSESSEE COM PANY UNDER THE 'BUY BACK SCHEME' FROM M/S. KSK INDIA. ACCORDIN GLY, HE PROCEEDED TO RECOMPUTE CAPITAL GAINS TAKING RS. 17 PER SHARE AS SALE CONSIDERATION IN PLACE OF RS. 10 PER SHARE. 5. APART FROM THE ABOVE, THE ASSESSING OFFICER DISALLO WED THE CLAIM FOR INVESTMENT WRITTEN OFF OF RS. 10,20,000 P ERTAINING TO INVESTMENTS MADE IN CERTAIN COMPANIES. FURTHER, THE ASSESSING OFFICER DISALLOWED INTEREST ON BORROWINGS OF RS. 1, 24,09,090 ON THE GROUND THAT THE LOANS WERE TAKEN FOR MAKING INV ESTMENT IN SHARES, THE INCOME FROM WHICH IS EXEMPT U/S. 10(23A ) OF THE ACT. 6. BEFORE THE CIT(A), THE ASSESSEE CONTENDED THAT M/S. K & S CONSULTING GROUP (P) LTD.. HYDERABAD (THE ASSESSEE) IS IN THE BUSINESS OF MANAGEMENT CONSULTANCY AND PROJECT DEVE LOPMENT SERVICES. THE ASSESSEE HAS BEEN IN EXISTENCE SINCE APRIL 1998 AND INCORPORATED M/S. KSK INDIA IN FEBRUARY, 2001. M/S. KSK INDIA THEREAFTER BEGAN PROMOTING MULTIPLE POWER PRO JECT COMPANIES (AS SPECIAL PURPOSE VEHICLES) TO IMPLEMEN T VARIOUS POWER PROJECTS ACROSS INDIA AND THIS NECESSITATED M /S. KSK INDIA TO ACCESS VALUABLE CAPITAL BOTH FROM INDIA AN D ABROAD. TO FURTHER THE BUSINESS OF M/S. KSK INDIA, IN 2004 THE ASSESSEE COMPANY SOUGHT PARTICIPATION OF IDBI, REPUTED FINAN CIAL INSTITUTION OF INDIA. IDBI HAS CONSENTED TO INVEST RS. 2.5 CRORES AND THEREAFTER IDBI AND THE PARTIES HAVE ENTERED IN TO SHARE HOLDERS AGREEMENT. 7. THE ASSESSEE SUBMITTED THAT ONE OF THE COVENANTS RE LATING TO THE SAID SHAREHOLDERS AGREEMENT RELATE TO PURCHA SE OF THE SHARES BY THE ASSESSEE I.E. IDBI ENJOYED THE LEGAL RIGHT TO PUT ITA NO. 1844/HYD/2012 M/S. K & S CONSULTING GROUP (P) LTD. ============================ 4 THE SHARES OF M/S. KSK INDIA AND TO COMPEL THE ASS ESSEE TO ACQUIRE THE SHARES AT A PRICE DETERMINED. THE ASSE SSEE COMPANY HELD 2,85,12,900 EQUITY SHARES ACQUIRED FRO M TIME TO TIME WITH A FACE VALUE OF RS. 10/- IN M/S. KSK INDI A. DURING THE PREVIOUS YEAR RELEVANT TO THE A.Y. 2007-08, THE COM PANY ACQUIRED 12,50,000 EQUITY SHARES, 12,50,000 PREFERE NCE SHARES WHICH WERE ORIGINALLY ACQUIRED BY IDBI AT RS. 10 AT A PRICE OF RS. 16.09 PER SHARE. 8. THE ASSESSEE SUBMITTED BEFORE THE ASSESSING OFFICER THAT THE ASSESSEE COMPANY ALSO ACQUIRED 10,900 EQUITY SH ARES FROM THE INDIVIDUAL PROMOTERS OF M/S. KSK INDIA AT A PRI CE OF RS. 10/- PER SHARE DURING THE PREVIOUS YEAR RELEVANT TO A.Y. 2007- 08. IN NOVEMBER 2006, M/S. KSK INDIA RECEIVED AN IN FUSION OF APPROXIMATELY RS. 185 CRORES FROM M/S. KSK MAURITIU S (A 100% SUBSIDIARY OF LSE-AIM MARKET) TOWARDS SUBSCRIPTION OF NEW EQUITY AND PREFERENCE CAPITAL. WHILE EARMARKING SUB STANTIAL PART OF THE FUNDS FOR FUNDING NEW POWER PROJECTS, M /S. KSK INDIA OFFERED A SCHEME OF BUY BACK OF SHARES AT PAR VALUE TO ITS SHAREHOLDERS. IN RESPONSE, THE ASSESSEE COMPANY TE NDERED ITS ENTIRE HOLDINGS (I.E. BOTH ORIGINALLY HELD BY IT AN D SUBSEQUENTLY ACQUIRED DURING THE PREVIOUS YEAR RELEVANT TO A.Y. 2007-08} IN M/S. KSK INDIA UNDER THE BUY BACK SCHEME @ RS. 10 P ER SHARE. LETTER OF OFFER OF BUY BACK BY M/S. KSK IND IA IS DATED 6 TH NOVEMBER 2006. IN THE PROCESS THE COMPANY INCURRE D SHORT TERM CAPITAL LOSS OF RS. 1,52,19,864 IN RESPECT OF 25,10,900 SHARES AND LONG TERM CAPITAL LOSS OF RS. 2,22,41,36 0 IN RESPECT OF NO. 2,85,12,900 OF SHARES. THE ASSESSIN G OFFICER RAISED TWO KEY ISSUES IN THE ORDER PASSED U/S. 143( 3) FOR A.Y. 2007-2008 DATED 29.12.2009 WITH RESPECT TO IDBI SHA RE PURCHASE AS WELL AS TENDERING OF SHARES BY THE ASSE SSEE UNDER BUY BACK OFFER. THE POSITION OF THE ASSESSING OFFI CER ON THESE ISSUES IS FACTUALLY INCORRECT , UNTENABLE AND CONTRARY TO ITA NO. 1844/HYD/2012 M/S. K & S CONSULTING GROUP (P) LTD. ============================ 5 PROVISIONS OF THE INCOME-TAX ACT, 1961. THE RESPON SES TO EACH OF THE POSITIONS ARE DETAILED AS UNDER: DATE OF SHARE SUBSCRIPTION BY IDBI IN KSK INDIA 2 ND DECEMBER, 2004 DATE OF PURCHASE OF SHARES FROM IDBI BY THE ASSESSEE. 25 TH SEPTEMBER, 2006 PURCHASE PRICE: SPECIAL PUT UNDER SHAREHOLDERS AGREEMENT @ RS. 16.09 PER SHARE OF FACE VALUE OF RS. 10 PAID BY ASSESSEE TO IDBI. PURCHASE OF SHARES BY ASSESSEE FROM INDIVIDUAL PROMOTERS 10,900 EQUITY SHARES @ RS. 10 PER SHARE. BUY BACK OFFER BY KSK-INDIA RS. 10 PER SHARE. DATE OF BUY BACK OFFER LETTER 6 TH NOVEMBER, 2006 9. THE ASSESSEE SUBMITTED BEFORE THE CIT(A) THAT THE PURCHASE PRICE PAID BY IT TO ACQUIRE THE SHARES OF M/S. KSK INDIA FROM IDBI CANNOT BE COMPARED WITH THE BUYBACK PRICE. IN THE IDBI TRANSACTION , THE ASSESSEE WAS UNDER A CONTRACTUAL OBLIGATION TO PROVIDE EXIT TO IDBI AND PAY A CERTAI N PRICE FOR THE ACQUISITION OF SHARES. THE FACT OF THE CASE IS THAT THE ASSESSEE COMPANY PURCHASED SHARES FROM IDBI BASED ON SHARE H OLDERS AGREEMENT DATED 2.12.2004. AS PER THE SAID AGREEMEN T, THE ASSESSEE COMPANY SHOULD PURCHASE THE SHARES IF ASSE SSEE- COMPANY FAILS TO GET THE LISTING OF SHARES OF M/S. KSK INDIA WITHIN A PERIOD OF 2 YEARS FROM THE DATE OF ITS SUB SCRIPTION. THEREFORE, THE PURCHASE FROM IDBI WAS CONSUMMATED. HENCE, THE CLAIM BY THE ASSESSING OFFICER THAT 2 YEARS HAV E NOT LAPSED AND HENCE M/S. KSK INDIA NOT OBLIGATED TO PROVIDE E XIT TO IDBI IS CONTRARY TO FACTS ON ACCOUNT OF THE FOLLOWING: (I) ANY INDIAN COMPANY THAT SEEKS TO GET ITS SHARES LIS TED ON INDIAN STOCK EXCHANGES WOULD REQUIRE TO FOLLOW A DETAILED PROCEDURE THAT INVOLVES (A) FIRST FILE A D RAFT ITA NO. 1844/HYD/2012 M/S. K & S CONSULTING GROUP (P) LTD. ============================ 6 RED HERRING PROSPECTUS WITH SEBI (THAT TAKES 2-3 MONTHS FOR PREPARATION) (II) THEREAFTER SEEK SEBI'S COMMENTS (THIS TYPICALLY TAK ES 60 DAYS) AND FINALLY (III) THE COMPANY THEN TO UNDERTAKE A BOOK BUILDING PROCESS FOR RAISING THE FUNDS. SINCE THERE WERE NO ADVERSE MARKET CONDITIONS AND THE TWO YEAR PERIOD W AS SCHEDULED TO EXPIRE IN NOVEMBER 2006, BY MID SEPTEMBER IT WAS ADEQUATELY CLEAR TO IDBI THAT THE LISTING EVENT OF M/S. KSK INDIA WOULD NOT HAPPEN. A RELEVANT EXAMPLE OF M/S. KSK INDIA IN THIS REGARD IS THE IPO OF M/S. KSK INDIA DURING 2007-08 WHEREIN THE INVESTMENT BANKERS WERE APPOINTED FOR DUE DILIGENCE IN MID NOVEMBER 2007, DRHP FILED WITH SEBI IN FEBRUARY 2008, BOOK BUILDING PROCESS IN JUN E 2008 AND LISTING ACHIEVED IN JULY 2008 (8 MONTHS SINCE FOR THE LISTING PROCESS) 10. THE ASSESSEE SUBMITTED BEFORE THE CIT(A) THAT IDBI HAS CHOSEN TO EXERCISE ITS PUT OPTION UNDER CLAUSE NO. 10.1.02 OF SHARE HOLDERS AGREEMENT DATED 2.12.2004, ON INABILI TY OF M/S. KSK INDIA TO DEMONSTRATE THE POSSIBILITY OF IPP. H ENCE THE IDBI EXIT PRICE OF RS. 16.09 PER SHARE WAS BASED ON THE SHAREHOLDERS AGREEMENT. HAD THE ASSESSEE NOT DISCHARGED ITS CONT RACTUAL OBLIGATIONS, IT WOULD NOT HAVE BEEN ABLE TO ACHIEVE THE OVERALL OBJECTIVES/PLANS OF THE ASSESSEE COMPANY I.E., IMPL EMENTATION OF VARIOUS POWER PROJECTS IN INDIA. THE PRICE PAID TO OTHER SHAREHOLDERS IS NOT COMPARABLE AS THERE WAS NO CONT RACTUAL OBLIGATION ON THE PART OF THE ASSESSEE. 11. THE ASSESSEE SUBMITTED BEFORE THE CIT(A) THAT THE ASSESSING OFFICER RAISED AN ISSUE WITH RESPECT TO W HAT IS THE ITA NO. 1844/HYD/2012 M/S. K & S CONSULTING GROUP (P) LTD. ============================ 7 SHARE VALUE OF THE M/S. KSK INDIA ON THE DATE OF B UY BACK I.E. 6.11.2006 AND THE UNDERLYING METHOD (CCI GUIDELINES AND RBI SUBMISSION) TO ARRIVE AT SUCH VALUE. THE ASSESSING OFFICER ALSO HELD THAT THE VALUE OF THE SHARE AS ON THAT DATE OF LETTER OF BUY BACK I.E. 6.11.2006 IS HIGHER THAN ONE ARRIVED BASE D ON THE BALANCE SHEET DATED 31.3.2006. THEREFORE, THE VALUA TION REPORT SUBMITTED BY THE ASSESSEE-COMPANY CANNOT BE ACCEPTE D AS IT DOES NOT INDICATE FAIR VALUE OF THE SHARE ON 6.11.2 006. FURTHER THE MOTIVE OF THE ASSESSEE WAS TO REDUCE TAX LIABIL ITY. FURTHER, THE ASSESSING OFFICER CONTENDED THAT THE ASSESSEE C OMPANY WAS UNDER NO OBLIGATION TO OFFER ITS SHARES AT PAR UNDE R THE BUYBACK SCHEME AND THE INTENTION TO AVOID TAXES ANY SUBSEQU ENT SALE OF SHARES IN M/S. KSK INDIA BY THE INDIAN PROMOTERS. 12. THE ASSESSEE SUBMITTED THAT THE ABOVE ASSESSMENT ASSERTIONS ARE NOT CORRECT AS THE VALUATION OF EQUI TY SHARE OF A PRIVATE LIMITED COMPANY WILL ALWAYS BE BASED ON THE BALANCE SHEET DATE OF THE PRECEDING FINANCIAL YEAR IN WHICH A SHARE IS TO BE VALUED IN A PARTICULAR YEAR. FOLLOWING THE GENE RALLY ACCEPTED PRINCIPLE, THE ASSESSEE COMPANY HAS SUBMITTED THE C ALCULATION OF VALUATION OF SHARE AS ON 31.3.2006. AS PER THE S AID VALUATION, THE VALUE OF THE SHARE IN QUESTION HAS COME TO RS. 11.97 (PRIOR TO APPLYING DISCOUNT DUE TO NON PAYMENT OF DIVIDEND IN CASE OF UNLISTED COMPANIES) CALCULATION OF SHARE BY THE AUD ITORS OF THE COMPANY AND FILED WITH RBI IS ENCLOSED. THEREAFTER, THE ASSESSING OFFICER HAS CONSIDERED THE STATEMENT AS O N 6.11.2006 SHOWING ESTIMATED REALIZABLE VALUE OF THE ASSETS AN D LIABILITIES, WHICH IS NOTHING BUT AS APPENDED TO THE LETTER OF B UYBACK OFFER BY M/S. KSK INDIA. 13. THE ASSESSEE CONTENDED THAT AN ERRONEOUS CALCULATIO N WAS MADE BY THE ASSESSING OFFICER BY INCLUDING IN T HE NET WORTH, THE BANK BALANCE LYING IN THE COMPANY AS ON 4.11.2006, ITA NO. 1844/HYD/2012 M/S. K & S CONSULTING GROUP (P) LTD. ============================ 8 RECEIVED ON ACCOUNT OF SHARE APPLICATION MONEY PEND ING ALLOTMENT FROM M/S. KSK MAURITIUS WITHOUT ACCOUNTIN G FOR THE CORRESPONDING ENTRY. IF THE ERROR IS CORRECTED I.E ., EXCLUDED FROM THE CALCULATION AND WITHOUT ACCEPTING THE CONTENTIO N OF THE ASSESSING OFFICER EVEN IF ONE WERE TO CONSIDER THE DATE OF VALUATION AS 6.11.2006 (BUYBACK DATE) AS THE BASIS, THE SHARE VALUE OF THE COMPANY WITH RESPECT TO THE SHARES UND ER CONSIDERATION WILL BECOME RS. 10.58 AS AGAINST RS 1 8.15 ARRIVED BY ASSESSING OFFICER. THE ASSESSING OFFICER IN ARRI VING AT THE VALUE OF THE SHARE AT RS. 18.15 AFTER INCLUDING BAN K BALANCE OF RS. 184.74 CRORES PERTAINING TO NEW SHARES, THUS HA S BEEN FACTUALLY INCORRECT. 14. THE ASSESSEE SUBMITTED THAT ADOPTING DEEMED VALUE O F RS. 17/- PER SHARE, WHICH IS BASED ON CONSIDERATION OF INCORRECT FACTS AND FIGURES IS UNTENABLE. THE FOLLOWING ASSE RTION OF THE ASSESSING OFFICER IS INCORRECT: ' THE ASSESSEE IS TRYING TO AVOID PAYMENT OF CAPITAL GAINS IN INDIA BY UNDERVALUING T HE SHARE PRICE, WHEN M/S. KSK-INDIA ITSELF VALUED IT AT RS. 17/- WHEN ALLOTTING ITS SHARES TO A MAURITIUS BASED COMPANY. THE ASSESSEE COMPANY WAS UNDER NO OBLIGATION TO OFFER ITS SHARES AT PAR UNDER THE BUYBACK SCHEME. THE SALE OF INDIAN COMPANY SHAR ES BY A MAURITIUS BASED ENTITY IS NOT LIABLE TO PAY ANY CAP ITAL GAINS TAX IN VIEW OF THE DOUBLE TAXATION AGREEMENT BETWEEN INDIA N AND MAURITIUS. THE PURPOSE IS TO BOTH HAVE A CONTROL OV ER M/S. KSK INDIA INDIRECTLY AND ALSO AVOID PAYMENT OF TAX. THE PURPOSE BEHIND THE TRANSACTION IS TO SHIFT THE CONTROLLING STAKE TO AN ENTITY IN TAX HEAVEN AND TO AVOID PAYMENT OF TAX IN INDIA IN ANY SUBSEQUENT SALE OF SHARES IS THE INDIAN COMPANY. TH IS IS STRENGTHENED BY THE FACT THAT M/S. KSK INDIA WENT P UBLIC IN INDIA AT A HUGE PREMIUM OF RS. 220 PER SHARE IN SUBSEQUEN T YEAR. THE INTENTION IS TO AVOID TAXES ON ANY SUBSEQUENT SALE OF SHARES IN M/S. KSK -INDIA BY THE INDIAN PROMOTERS'. ITA NO. 1844/HYD/2012 M/S. K & S CONSULTING GROUP (P) LTD. ============================ 9 THE ABOVE OBSERVATION OF THE ASSESSING OFFICER IS I NCORRECT ON THE FOLLOWING REASONS: (A) IT IS SUBMITTED THAT THE FUNDS INVESTED INTO M/S. K SK INDIA BY M/S. KSK MAURITIUS (THAT ENABLED THE BUYBA CK OF THE ASSESSEE COMPANY SHARES BY M/S. KSK INDIA) H AVE BEEN PROVIDED BY ITS AIM MARKET-LSE LISTED PARENT COMPANY M/S. KSK POWER VENTURE PLC, WHICH HAS RAISE D PUBLIC CAPITAL (UNDER APPLICABLE PROSPECTUS IN UK) FROM LARGE INSTITUTIONAL AND PENSION FUNDS IN UK SUCH AS UNIVERSITIES SUPERANNUATION SCHEME (USS), STANDARD LIFE, SCOTTISH WIDOWS, ETC. (B) SECTION 11.5 (PAGE 120) OF THE AIM ADMISSION DOCUME NT THAT CLEARLY DOCUMENTS THE OBLIGATION OF ASSESSEE COMPANY UNDER THE REORGANIZATION AGREEMENT FOR RAIS ING THE PUBLIC FUNDS, THE BRIEF SUMMARY IS AS BELOW. (I) M/S. KSK POWER (THE AIM LISTED PARENT) SHALL INFUSE AN AMOUNT OF APPROXIMATELY RS. 185 CRORES INTO M/S. KSK MAURITIUS FROM THE FUNDS RAISED. (II) M/S. KSK MAURITIUS WOULD SUBSCRIBE TO EQUITY AND PREFERENCE SHARES OF M/S. KSK INDIA AND INFUSE THE FUNDS PROVIDED BY ITS PARENT. (III) M/S. K&S (THE ASSESSEE COMPANY) SHALL BE OBLIGED TO OFFER ITS SHAREHOLDING IN M/S. KSK INDIA UNDER BUYBACK AT A PAR (C) HENCE, IT IS IMPORTANT TO NOTE THAT NOT ONLY THE BU YBACK PARTICIPATION WAS AN OBLIGATION OF THE ASSESSEE COM PANY BUT SUBSTANTIAL NEW CAPITAL HAS BEEN COMMITTED INTO M/S. KSK INDIA AT A PREMIUM ONLY AFTER IT IS ACCOMPANIED BY ITA NO. 1844/HYD/2012 M/S. K & S CONSULTING GROUP (P) LTD. ============================ 10 AND UNDERSTANDING AND STIPULATION THAT THE MONIES R AISED ARE PRIMARILY EARMARKED FOR INVESTMENTS INTO UNDERL YING POWER PLANTS BY M/S. KSK INDIA AND NOT PROVIDING EX IT TO ANY SHAREHOLDERS IN PARTICULAR. HENCE, WHAT WAS PERMITTED BY THE NEW INVESTORS WAS BUY BACK OF EQUI TY AND REDEMPTION OF PREFERENCE AT VALUES NOT GREATER THAN PERMITTED UNDER REGULATORY REQUIREMENT. HENCE, IN T HIS CASE, IT WAS PAR VALUE (AS PER ERSTWHILE CCI GUIDEL INES AS APPLICABLE ON THAT DAY AND AUDITOR CERTIFICATE). T HE BASIS TO CONCLUDE THAT THE DEEMED VALUE OF SHARES AT RS. 17/- PER SHARE AS THE BASIS FOR ARRIVING AT CAPITAL GAIN S IS NOT CORRECT BECAUSE: (I) THE ASSESSING OFFICER HAS MISDIRECTED HIMSELF BY STATING THAT THE ASSESSEE IS UNDER NO OBLIGATION TO TENDER THE SHARES UNDER THE BUY BACK SCHEME. THE CORRECT QUESTION SHOULD BE 'WHETHER THE ASSESSEE WAS PROHIBITED FROM TENDERING THE SHARES' AND NOT 'WHETHER THE ASSESSEE WAS NOT OBLIGED TO TENDER THE SHARES'. THE BOARD OF DIRECTORS OF THE ASSESSEE AR E WELL WITHIN THEIR RIGHTS TO DECIDE TO TENDER THE SHARES AND THE INCOME TAX DEPARTMENT CANNOT SIT IN JUDGMENT OVER WHETHER THE DECISION OF THE BOARD IS APPROPRIATE OR NOT. THE BOARD HAS TAKEN A BUSINESS DECISION. THE INCOME TAX DEPARTMENT CAN BE CONCERNED ONLY WITH THE CONSEQUENCE ON INCOME TAX. IN THE PRESENT CASE, THERE IS NO ALLEGATION TH AT ANY UNDISCLOSED AMOUNT HAD BEEN RECEIVED. THE ACCEPTED POSITION IS THAT (I) THE TRANSACTION IS BO NA- FIDE AND NOT SHAM, (II) THE CONSIDERATION IS CLEAR AND UNAMBIGUOUS. THE INCOME TAX DEPARTMENT IS NOT ENTITLED TO QUESTION TO BUSINESS RATIONALE OF T HE TRANSACTION. ITA NO. 1844/HYD/2012 M/S. K & S CONSULTING GROUP (P) LTD. ============================ 11 (II) SEC. 46A IS A DEEMING PROVISION PROVIDING THAT THE DIFFERENCE BETWEEN THE COST OF ACQUISITION (SUBJECT TO INDEXATION PROVISION) AND THE FULL VALUE OF CONSIDERATION RECEIVED BY THE SHAREHOLDER SHALL BE DEEMED TO BE THE CAPITAL GAINS. SINCE, THERE IS NO ALLEGATION BY THE DEPARTMENT THAT THE ASSESSEE RECEIVED ANY UNDISCLOSED AMOUNT FOR THE TRANSFER OF SHARES, IT IS A CONFIRMED POSITION THAT NO NEW COMPUTATION IS APPLICABLE. (III) WITHOUT PREJUDICE TO THE ABOVE, THE CONTENTION OF THE ASSESSEE IS THAT THE TENDERING OF THE SHARES IN THE BUY BACK SCHEME IS IN THE BUSINESS INTERESTS OF THE ASSESSEE AND ITS SHAREHOLDERS. BY PARTICIPATING IN THE BUY BACK THE ASSESSEE COMPANY IN ADDITION TO PROMOTING BONA FIDE BUSINESS GROWTH OF M/S. KSK INDIA HAD DISCHARGED ITS ACCUMULATED LIABILITIES TO ENABLE ITSELF FOR FUTURE GROWTH. HEN CE, THE ABOVE PROPOSAL NOT ONLY ENABLED THE ASSESSEE TO HAVE CONTINUAL INTEREST IN THE VALUE CREATION AT M/ S. KSK INDIA BUT ALSO EXHAUST PART OF ITS LIABILITIES. THE REFERENCES BY ASSESSING OFFICER TO M/S. KSK INDIA GOING PUBLIC IN INDIA IN 2008, THE REFERENCE TO SHIFTING OF INTERESTS OUTSIDE INDIA AND M/S. KSK PL C HAS NO RELEVANCE IN THIS CASE AS EITHER WAY M/S. K&S BEING INDIRECTLY INTERESTED IN THE KSK GROUP WOULD HAVE TO COMPLY WITH THE APPLICABLE REGULATIONS INCLUDING INCOME TAX LAWS AS AND WHEN IT DISPOSES ITS INVESTMENTS. HENCE, THIS TRANSACTIO N DOES NOT STAND OUT AS A CASE OF DEVICE TO AVOID TAX , WHILE IT IS A SHEER MECHANISM FOR CREATION OF VALUE , IN POWER PROJECTS IN INDIA. ITA NO. 1844/HYD/2012 M/S. K & S CONSULTING GROUP (P) LTD. ============================ 12 (IV) CONSEQUENT TO THE INFUSION OF FUNDS IN M/S. KSK INDIA BY M/S. KSK MAURITIUS, AS PART OF ARRANGEMENTS EXPLAINED ABOVE, THE UNDERLYING PROJECTS MOVED INTO SUBSTANTIAL LEVEL OF PROGRESS AND DEVELOPMENT. THE SAME IS DEMONSTRATED BY THE FACT THAT SUBSEQUENT TO SUCH INFUSION, MULTIPLE POWER PROJECTS INVESTMENTS HAVE BEEN MADE BY M/S. KSK INDIA THAT RESULTED IN CUMULATIVE TAX PAYMENTS OF OVER RS. 140 CRORES BY M/S. KSK INDIA AND THE VARIOUS INVESTEE POWER PLANT COMPANIES UP TO 31 ST MARCH 2010 AS AGAINST HOLDING BY THE ASSESSING OFFICER THAT 'THE INTENTION IS TO AVOID TAXES ON ANY SUBSEQUENT SALE OF SHARES IN M/S. KSK INDIA BY THE INDIAN PROMOTERS. (V) HENCE, IN CASE THE ASSESSEE COMPANY CHOSE NOT TO TENDER ITS SHARES UNDER BUYBACK AT PAR THERE WOULD NOT HAVE BEEN ANY INFUSION OF CAPITAL INTO M/S. KSK INDIA AND THE VERY BASIS FOR IMPLEMENTATION OF VARIOUS POWER PROJECTS AND SUBSEQUENT GOING TO PUBLIC IN 2008, VALUE CREATION , PAYMENT OF TAXES AS OUTLINED ABOVE WOULD BE NON-EST . (VI) IN ADDITION TO ALL THE ABOVE FACTS AND CIRCUMSTANCE S , FINALLY, IT IS HUMBLY SUBMITTED THAT THE ASSESSING OFFICER HAS NO POWER UNDER THE INCOME TAX ACT TO SUBSTITUTE ANY VALUE FOR THE 'FULL VALUE OF CONSIDERATION' IN COMPUTING CAPITAL GAINS IN RESPEC T OF MOVABLE PROPERTIES. THE ASSESSING OFFICER HAS SUCH POWERS U/S. 50C ONLY IN RESPECT OF IMMOVABLE PROPERTIES BEING LAND OR BUILDINGS. THEREFORE , THE SUBSTITUTION OF A VALUE OF CONSIDERATION IS ERRONEO US AND IS IN VIOLATION OF SEC. 46A OF THE IT. ACT. ITA NO. 1844/HYD/2012 M/S. K & S CONSULTING GROUP (P) LTD. ============================ 13 15. THEREFORE BOTH THE CONTENTIONS OF THE ASSESSING OFF ICER ON PURCHASE OF SHARES FROM IDBI AS WELL TENDERING SHAR ES UNDER BUYBACK ARE NOT ONLY FACTUALLY INCORRECT BUT UNTENA BLE AS THEY WERE UNDERTAKEN BY THE ASSESSEE UNDER LEGALLY VALID AND BINDING OBLIGATIONS AND IN ACCORDANCE WITH THE PROV ISIONS OF INCOME-TAX ACT, 1961. FURTHER DUE TO THE ENVISAGED VISION OF CREATION OF WEALTH BY ASSESSEE COMPANY, CONTRARY TO THE STATEMENT OF THE ASSESSING OFFICER THE TRANSACTION HAS RESULTED IN PAYMENT OF TAXES IN INDIA BY KSK GROUP COMPANIES AND IN NO WAY TO BE CONSTRUED THIS WAS DONE TO AVOID PAYMENT OF TAXES. 16. AFTER HEARING THE ABOVE ARGUMENTS OF THE ASSESSEE T HE CIT(A) OBSERVED THAT IDBI HAS CHOSEN TO EXERCISE IT S 'PUT OPTION', ON INABILITY OF M/S. KSK INDIA, TO UNDERTA KE AN IPO WITHIN THE SPECIFIED PERIOD. THE ASSESSEE HAS ALSO CONTENDED THAT VALUATION OF EQUITY SHARES IS DONE BASED ON TH E BALANCE SHEET OF THE PRECEDING FINANCIAL YEAR AND QUESTIONE D THE METHOD OF VALUATION ADOPTED BY THE ASSESSING OFFICER, INCL UDING TAKING INTO ACCOUNT THE SHARE APPLICATION MONEY DEPOSITED IN THE BANK FOR THE PURPOSES OF VALUATION, WHICH IS IN THE NATU RE OF A LIABILITY AND IS NOT SHARE CAPITAL PER SE. THE ASSESSEE HAS A LSO STATED THAT THE EQUITY SHARES OF M/S. M/S. KSK INDIA WERE VALUED BASED ON THE GUIDELINES ISSUED BY THE ERSTWHILE CON TROLLER OF CAPITAL ISSUES. FURTHER, THE ASSESSEE ITSELF HAS PU RCHASED SHARES OF M/S. KSK INDIA AND FROM INDIVIDUAL PROMOT ERS DURING THE YEAR AT FACE VALUE OF RS. 10/- PER SHARE. WHIL E THERE IS JUSTIFICATION IN FIXING A PARTICULAR PRICE AS FAR A S IDBI IS CONCERNED, IN VIEW OF THE SHAREHOLDERS AGREEMENT, T HE FACT THAT THE ASSESSEE PURCHASED SHARES AT FACE VALUE OF RS. 10/- FROM M/S. KSK INDIA AND INDIVIDUAL PROMOTERS, INDICATES THAT THE RATE ADOPTED MAY BE REASONABLE. THIS APART, IT SHO ULD ALSO BE NOTED THAT MAJORITY OF THE SHARES OF M/S. KSK INDIA HELD BY THE ASSESSEE HAVE IN FACT BEEN ACQUIRED AT FACE VALUE O F RS. 10/- PER ITA NO. 1844/HYD/2012 M/S. K & S CONSULTING GROUP (P) LTD. ============================ 14 SHARE. FURTHER, VALUATION OF SHARES AT DIFFERENT R ATE CAN BE ADOPTED ONLY WHEN THERE IS A SPECIFIC PROVISION FOR THE SAME IN THE INCOME-TAX ACT. IN ABSENCE OF ANY SUCH SPECIFI C PROVISION, THE CIT(A) DID NOT AGREE WITH THE FINDINGS IN THE A SSESSMENT ORDER. ACCORDINGLY, THE CIT(A) DELETED THE ADDITION MADE ON ACCOUNT OF LONG AND SHORT TERM CAPITAL GAIN. AGAIN ST THIS, THE REVENUE IS IN APPEAL BEFORE US. 17. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATE RIAL ON RECORD. IN THE PRESENT CASE VALUATION OF EQUITY SHARES HAS BEEN DONE ON THE BASIS OF VALUE REFLECTED IN THE BA LANCE SHEET OF THE SHARES IN THE PRECEDING FINANCIAL YEAR AND ALSO CONSIDERED THE GUIDELINES ISSUED BY THE CONTROLLER OF CAPITAL ISSUES AND THE ASSESSEE ALSO ITSELF PURCHASED THE SHARES OF M/S. K SK INDIA AND ALSO FROM INDIVIDUAL PROMOTERS DURING THE YEAR AT T HE FACE VALUE OF RS. 10 PER SHARE AND THE PRICE ADOPTED FOR PURCH ASING SHARES FROM IDBI CANNOT BE YARDSTICK TO DETERMINE PRICE OF THE SHARES PURCHASED FROM THE INDIVIDUAL PROMOTERS. IN THE CA SE OF PURCHASE OF SHARES OF IDBI AT HIGHER PRICE AS THERE IS A SHAREHOLDERS AGREEMENT DATED 2.12.2004 AS PER WHICH THE ASSESSEE IS DUTY BOUND TO PURCHASE THE SHARES AS PE R THAT AGREEMENT AT A PRICE OF RS. 16.09 PER SHARE. FURTH ER THE QUESTION OF UNDERSTATEMENT CANNOT BE ASCERTAINED ON THE BASIS OF VALUE OF SHARES PAID FOR SHARES PURCHASED FROM I DBI. IN OUR OPINION, TO COME TO A CONCLUSION THAT THERE IS UNDE RSTATEMENT OF SALE PRICE, THE ASSESSING OFFICER IS REQUIRED TO BR ING ON RECORD THE CORRECT MARKET VALUE OF THE SHARES DURING THAT PERIOD. THE SHARES WHICH ARE SOLD ARE RELATING TO SHARES OF A P RIVATE LIMITED COMPANY I.E., M/S. KSK INDIA. THE SHARES OF PRIVAT E LIMITED COMPANY ARE NOT EASILY TRANSFERABLE AND HENCE ITS T RANSFER IS RESTRICTED. THEY CANNOT BE FREELY BOUGHT AND SOLD IN THE OPEN MARKET. BEING SO, IN OUR OPINION, THE VALUE ADOPTE D IN RESPECT OF TRANSACTION WITH IDBI CANNOT BE A BASIS TO DETER MINE THE SALE ITA NO. 1844/HYD/2012 M/S. K & S CONSULTING GROUP (P) LTD. ============================ 15 PRICE WITH REFERENCE TO OTHER SHARES. THE CALCULAT ION OF CAPITAL GAIN CAN ONLY BE WITH REFERENCE TO ACTUAL AMOUNT RE CEIVED AND NOT ON ANY OTHER NOTIONAL VALUE WHICH IS TAKEN TO B E THE MARKET VALUE. THE SALE CONSIDERATION ACTUALLY RECEIVED BY THE CASE CANNOT BE REJECTED UNLESS THERE IS EVIDENCE TO SHO W THAT THE ASSESSEE HAS RECEIVED MORE MONEY THAN WHAT IS SHOWN TO THE DEPARTMENT. EVEN IF IT IS ASSUMED THAT THE SHARES ARE TRANSFERRED ON A VALUE LESS THAN THE MARKET VALUE, AND AS LONG AS SALE CONSIDERATION RECEIVED IS AS PER THE DOCUME NT, THE CAPITAL GAIN CAN ONLY BE CALCULATED ON THE ACTUAL A MOUNT RECEIVED AND NOT ON ANY OTHER VALUE TAKEN TO BE THE MARKET VALUE. IN THE PRESENT CASE, THERE IS NO EVIDENCE T O SHOW THAT THE ASSESSEE HAVING RECEIVED SALE CONSIDERATION IN EXCE SS OF THE CONSIDERATION SHOWN TO THE DEPARTMENT. WE ARE NOT IN A POSITION TO HOLD THAT THE ASSESSEE HAS SUPPRESSED T HE SALES CONSIDERATION. EVEN OTHERWISE, THE EXPRESSION 'FUL L VALUE OF CONSIDERATION' CANNOT BE CONSTRUED AS HAVING REFERE NCE TO THE MARKET VALUE OF THE ASSETS, BUT ONLY MEANS THAT THE FULL VALUE OF CONSIDERATION RECEIVED BY THE ASSESSEE ON SALE. AC CORDINGLY, PLACING RELIANCE ON THE JUDGEMENT OF THE SUPREME CO URT IN THE CASE OF K.P. VERGHESE VS. ITO (131 ITR 597) (SC), W HEREIN THE APEX COURT HELD THAT SECTION 52(2) OF THE INCOME-TA X ACT, 1961, CAN BE INVOKED ONLY WHERE THE CONSIDERATION FOR THE TRANSFER OF A CAPITAL ASSET HAS BEEN UNDERSTATED BY THE ASSESSEE, OR, IN OTHER WORDS, THE FULL VALUE OF THE CONSIDERATION IN RESPE CT OF THE TRANSFER IS SHOWN AT A LESSER FIGURE THAN THAT ACTU ALLY RECEIVED BY THE ASSESSEE, AND THE BURDEN OF PROVING UNDERSTA TEMENT OR CONCEALMENT IS ON THE REVENUE; AND THE SUB-SECTION HAS NO APPLICATION IN THE CASE OF A BONA FIDE TRANSACTION WHERE THE CONSIDERATION RECEIVED BY THE ASSESSEE HAS BEEN COR RECTLY DECLARED. IN VIEW OF THE FINDING OF FACT RECORDED B Y THE TRIBUNAL, THERE WAS NO QUESTION OF INVOKING SECTION 52(2) OF THE ACT. THE ITA NO. 1844/HYD/2012 M/S. K & S CONSULTING GROUP (P) LTD. ============================ 16 HIGH COURT WAS, THEREFORE, RIGHT IN REFUSING TO CAL L FOR THE REFERENCE FROM THE TRIBUNAL AND REJECTING THE APPLI CATION UNDER SECTION 256(2) OF THE ACT, WE ARE NOT INCLINED TO A LLOW THE GROUNDS TAKEN BY THE REVENUE. 18. IN VIEW OF THE ABOVE DISCUSSION, WE ARE INCLINED TO DISMISS THE GROUNDS RAISED BY THE REVENUE. 19. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 23 RD AUGUST, 2013. SD/ - (SAKTIJIT DEY) JUDICIAL MEMBER SD/ - (CHANDRA POOJARI) ACCOUNTANT MEMBER HYDERABAD, DATED 23 RD AUGUST, 2013 TPRAO COPY FORWARDED TO: 1 . THE DCIT, CIRCLE - 2(1), HYDERABAD, 8 TH FLOOR, 'B' BLOCK, ROOM NO. 825, IT TOWERS, AC GUARDS, HYDERABAD-4. 2. M/S. K & S CONSULTING GROUP (P) LTD., 8 - 2 - 293/82/A/ 431/A, ROAD NO. 22, JUBILEE HILLS, HYDERABAD-500 03 3. 3 . THE CIT(A), VIJAYAWADA. 4. THE CIT - II, HYDERABAD. 5 . THE DR ' A ' BENCH, ITAT, HYDERABAD .